Entries from September 2008 ↓

Colour this the nightmare scenario for George Bush and the American political establishment. The American Congress has reached a total stalemate on the passage of the $700 billion bailout of Wall Street. At this hour, the bill has been technically defeated, a development which has caused the Dow to sag more than 500 points and the TSX to plunge over 800 points.

This comes just hours after three more banks failed – one in the US, one in Britain and another in Europe. Without the bailout, American leaders are warning of the possibility of Depression-like consequences, including the failure of dozens, perhaps more than a hundred, banks.

Congress is paralyzed at the moment, as members horsetrade in the corridors and hallways, with the White House desperate to find enough votes to get this deal done. With the US Presidential election less than 40 days away, this has the potential to be a game-changing development of historic proportions, virtually guaranteeing the defeat of Republican John McCain, and seriously hobbling the coming presidency of Barack Obama.

If Congress does not pass this bill when it comes before the legislature once again, the market drop seen thus far will pale in comparison to the consequences at the end of the day.

From the Globe and Mail, and wire services:

Mr. Bush and his economic advisers, as well as congressional leaders in both parties had argued the plan was vital to insulating ordinary Americans from the effects of Wall Streetâ€™s bad bets. The version that was up for vote Monday was the product of marathon closed-door negotiations on Capitol Hill over the weekend.

â€œWeâ€™re all worried about losing our jobs,â€ Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. â€œMost of us say, â€˜I want this thing to pass, but I want you to vote for it â€” not me.â€™ â€œ

With their dire warnings of impending economic doom and their sweeping request for unprecedented sums of money and authority to bail out cash-starved financial firms, Bush and his economic chiefs have focused the attention of world markets on Congress, Mr. Ryan added.

â€œWeâ€™re in this moment, and if we fail to do the right thing, Heaven help us,â€ he said.

From the Wall Street Journal:

Investor sentiment on Monday also suffered a blow from aggressive selling in European markets after four financial institutions there sought rescue plans. Three governments bailed out Fortis, the U.K. government nationalized mortgage lender Bradford & Bingley, Germanyâ€™s Hypo Real Estate Holding was rescued by a consortium, and Iceland stepped in to save a local bank. All major European indexes were down more than 4% , with financial stocks leading declines.

The troubles in Europe sent the dollar rallying against the euro and the British pound. The U.S. Dollar Index, which measures the greenbackâ€™s value against a basket of six overseas denominations, rose 0.7%.

Oil futures dropped slid almost $8, trading under $100 a barrel in New York as fears about slowing demand due to global economic weakness gripped the commodity markets. The broad Dow Jones-AIG Commodity Index slid more than 4%.

Analysts said the flurry of developments around the world is confirming fears that the global financial contagion is likely to spread further before any recovery. â€œThereâ€™s an increasing realization that the cleanup and the mending of all thatâ€™s gone wrong is going to take an extended period to work through, and weâ€™re going to see an extended recovery period,â€ said Jamie Spiteri, senior dealer at Shaw Stockbroking in Sydney.

Well, it looks like there will be no further voting in Congress today – at least, that’s the buzz. Too dangerous. Too much risk of another failure. Stakes far too high.

The immediate consequences are unknown, but it would appear this development will accelerate the financial meltdown currently taking place. Given current events, consumers might well expect higher borrowing costs, just as homeowners face stiffer mortgage costs and new home buyers encounter a cold shoulder from bankers. In our modern world, credit is the lifeblood of commerce, and the failure of this bailout is potentially monumental.

So, are there consequences for Canada? For our election? For the government?

The coming few days will tell, of course, but the fact remains we are vulnerable. As detailed in the post below, the current administration has not taken defining steps to safeguard Canadians.

I hope to post some further thoughts on the precarious position we are all now in, within a few hours. Needless to say, things are not getting better. I mean, last night the biggest bank failure in US history occured, and it was not even the lead news item this morning. Yikes!

The $700-billion bailout of Wall Street looks decidely iffy. Even if it takes place amid the posturing positions and shifting platform sands of Obama and McCain, it will likely be a fatally flawed rescue, bound to come unseamed in the coming months. Sorry to say, but these are just the early chapters of a story with much more to come. And so long as instability reigns, residential real estate will be the victim.

The Canadian market is doing exactly what I forecast. This will continue. Declines in prices of 10% or 12% in Alberta will become 20% and 25%. Vancouver ultimately will be even harder hit, and Toronto values will drift lower at the end of 2009 by about 15%. Some neighbourhoods, far more.

The deniers will keep it up. You could hear more of that this week on CBC and CTV, as the bank economists and hopeful, battered, savaged realtors were trotted out to bolster confused consumers. Hopefully, Canadians will trust their sense that all is not well, and avoid being talked into a purchase at the very time when equity is most at risk.

Yesterday a local sent me the real estate board report for one market I am campaigning in – Milton, the fastest growing town in Canada, where there are acres and acres of subdividions full of fresh-faced young couples who bought in many cases with 1.5% down. They lusted after granite counter tops and the perceived financial maturity and stability of a new home, and were lulled into this by builders, agents, banks and families who all believed (or profited from) the cult of the house.

The average price in Milton last month was 9.4% below year-ago levels – and this is in the one area of the GTA (an area of about 4 million people) with the most frenetic real estate activity. in practical terms, this translates into an average price of $330,000, down from $365,000. Do you have any idea what this means to a young family with no equity, and a big mortgage?

In this you can see the seeds of a Canadian meltdown. If you can’t, call the CBC.

BTW, the article below is in the Globe today:

New economic climate puts chill on Toronto real estate prices

The country’s largest housing market, Toronto, is slowing as sales drop and a decade-long run-up in prices stalls.

Recent figures show prices have flatlined across the Toronto region, and in both middle and high ends of the market.

The soft market and forecasts of more of the same ahead do not signal a U.S.-style tumble, experts said yesterday, but rather point to a dawning realization that sellers can no longer count on unrelenting price hikes to boost their worth.

Fuelling the new reality was a move yesterday by two banks – TD Canada Trust and Bank of Montreal – to raise mortgage rates in Canada as fears of inflation resonate through the bond market and U.S. lawmakers edged closer to a deal on a $700-billion (U.S.) bailout plan for Wall Street banks.

“Unless you are skillful on the timing or you are lucky you don’t tend to make a killing on real estate.”

Home price declines have already hit Calgary, Edmonton and Vancouver, and now cracks in the market appear to be spreading into Toronto. Existing home sales activity dropped by 22 per cent in August from the same month a year earlier, while prices edged up by just 0.8 per cent, according to the Canadian Real Estate Association.

Though cooling off, the Toronto house market has not hit the wall, according to Mr. Drummond and others.

“We have gently nudged the wall,” he said. “I expect barely positive [price rises] over the next little while.” But he went on to ask and answer his own question: “Are they going to come down Miami style? Absolutely not.”

According to the Toronto Real Estate Board, average house prices dipped 1 per cent in August over a year earlier but climbed in the first half of September. For the first half of this month, the board recorded 998 sales, a 23-per-cent drop from the same period a year ago.

As of mid-month, the average house price in Toronto was $386,524, up marginally from the same period a year ago and 12 per cent higher than 2006.

There is still a lot of money in the market, contended Michael Polzler, executive vice-president and regional director, RE/MAX Ontario-Atlantic Canada, with people with realistic expectations still able to sell their homes.

But he cautioned that homes are likely to stay on the market longer than during the height of the boom, and sellers shouldn’t expect bidding wars.

This is good news for buyers who until recently had no crack at markets such as central Toronto, he said.

Now these shoppers

may have a chance to get

into desirable markets and make more careful purchases than they did in the past, he said.

In the luxury home market, Toronto was among five of 15 cities that experienced year-over-year sales declines, according to a report yesterday by RE/MAX.

Sales of homes listed at $1.5-million or more dropped from 505 in the first seven months of 2007, to 487 in the same period this year.

The timing of the slowdown comes as Toronto homeowners brace for word next month from the Municipal Property Tax Assessment Corporation on changes in home property values since 2005.

Earlier this month, the agency said that as of January, 2008, property values have risen an average of 20 per cent across the province.

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The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.